Vice President of the European Commission responsible for Competition Policy

The impact of the crisis State aid regime for banks

European Economic and Social Committee

Brussels, 4 October 2011

Ladies and Gentlemen:

First of all, I want to thank Michael Smyth for inviting me to address the economic section of the European Economic and Social Committee.

In my recent meeting with President Nilsson, we discussed how the work of the Economic and Social Committee can contribute to a good enforcement of competition policy and how our cooperation can be strengthened.

I told your President that I count on you for that purpose, as you can be sure that I will be keen to work with you.

This is my first visit here as Commissioner for Competition; however, in my previous portfolio as Commissioner for Economic and Monetary Affairs, we’ve had several opportunities to exchange views.

I'm looking forward to coming here as often as in the past.

Today, I would like to share with you some reflections on the latest developments in the financial crisis.

To do so, I will present the main findings of a study that my services have carried out at the request of the European Parliament.

The study looks at the effects of the temporary and exceptional State aid rules for banks in distress adopted at the beginning of the crisis as part of the policy response of the European Commission.

I will also update you on the restructuring of the banks that have received public support.

This restructuring is a precondition for the European banking sector to return to long-term viability and to its core function of lending to the real economy. It is also one of the requirements we impose on banks before we can approve their bail outs under our State aid rules.

The instruments that we have used to cope with the banking crisis are four Communications, on banking, recapitalisation, impaired assets, and restructuring.

The emergency State aid package was designed with two goals in mind:

First, to ensure that the support would not distort competition across the EU to the detriment of the internal market;

Second, to help put financial markets on a sounder footing to prepare for the post-crisis scenario.

This medium-term goal is very important. We simply cannot afford to keep the levels of risk and the systemic fragility which have made this crisis so broad and deep. We cannot accept to spend such big amounts of taxpayers’ money again.

Since 2008, people throughout the EU have been asked to accept the huge government bailout of the financial sector and to endure the austerity measures required to bring public finances under control.

These measures touch directly the lives of citizens; this is why I believe that we need to be as transparent as possible with them. And – of course – we need to do our utmost to make the most efficient use of public money.

It is crucial that we explain to our citizens why this aid was necessary to avert the collapse of the financial system.

And we must explain to the Member States and to banks why the protection of our internal market needs a strict control of State subsidies.

The Commission has the duty to analyse the support measures and to clear them only on condition that the banks aided are viable in the medium-to-long term without asking for more taxpayers’ money; and that they don’t unduly jeopardise competition in the internal market.

Unfortunately, in spite of the many decisions that have been taken, we are not out of the woods yet;

the enduring sovereign-debt crisis is putting the whole euro area under severe stress;

the debt crisis, in turn, interacts with the banking sector, where liquidity tensions have appeared and some voices raise the need to further capitalise banks; and

because of these and other factors, we hear warnings of a double-dip recession.

We are all aware of the seriousness of the situation and of what is at stake.

Of course, the control of the State aid given to the banks under restructuring is not the only task to overcome the consequences of the financial crisis.

The financial sector must be oriented – first and foremost – towards its core function of meeting the financing needs of firms and households.

To this end, the Commission is in the process of changing the regulatory landscape for the financial industry.

Recent steps include, among others, the proposals on capital requirements – the so-called CRD IV – and the European Market Infrastructure Regulation, or EMIR.

President Barroso also announced a proposal for a tax on financial transactions in last week’s State of the Union speech to the European Parliament.

More initiatives are in the pipeline, such as the proposals on crisis management and bank resolution, and MIFID 2 for financial instruments – to name only the main ones.

As we wait for these initiatives to become operational, our day-to-day control of competition has guaranteed a strict oversight of the public support to the banking sector.

Since October 2008, under the crisis regime, we have taken restructuring decisions on 25 banks and we have seen the orderly liquidation of 11 more. The only negative decision we had to take involved a small Portuguese bank.

At present, we are working on restructuring plans for another 21 banks and we cannot exclude that this number could grow in the near future.

All our decisions follow the same set of principles. As a condition to approve the bailouts, we demand:

that banks remunerate and eventually repay the public support they receive;

that they take measures to address distortions of competition towards their unaided competitors;

that they restructure their business so that they can return to long-term viability without the need for more government support; and

that shareholders and hybrid-capital holders bear a fair share of the burden.

As to the latter point, to the best of my knowledge we are the only institution that explicitly imposes burden-sharing conditions on bailouts.

The Commission's work has reduced the amount of taxpayers’ money that has gone to financial institutions and has addressed the moral-hazard issue.

It is still too early to draw definitive conclusions on the impact of our decisions, because many measures are still being implemented.

However, as I said at the beginning, DG Competition prepared a study on the effects of the crisis-related measures between the last quarter of 2008 and end-2010.

The study finds that the aid granted to the financial sector has helped to stabilise financial markets and has maintained credit flows to the real economy even at the height of the crisis.

Our State Aid control mitigated the distortions of competition that would have been caused by government support to financial institutions across Member States and among banks within the internal market.

Overall, the aid effectively granted by Member States from October 2008 to December 2010 amounted to €1,240 bn.

Most of the aid used – €757 billion, or 61% of the total – was in the form of guarantees. This figure only takes into account the guaranteed bonds issued by aided banks, but it does not cover other forms of liabilities that may have been guaranteed on a case-by-case basis.

Other forms of aid were:

capital injections, €303 billion

impaired asset reliefs measures, €104 billion , and

liquidity measures, €77 billion.

The aid was concentrated in few Member States. At national level, the top three banking markets – the United Kingdom, Germany and France – received 60 % of the total amount of aid.

The aid was also concentrated on a limited number of banks. The ten largest beneficiaries in the EU received more than half of the total aid; the next 20 received one quarter; and all the other beneficiaries – about 190 banks – shared the remaining quarter among themselves.

This means that the public support had the potential to have significant effects on the competitive structure of the markets. However, market data suggest that this was not the case.

Let me give you three facts to make this point:

First, Europe’s banks have not retrenched behind national borders;

Second, overall the restructuring of the banking sector did not accelerate the concentration trend that had been observed since 2001. Here I need to add that some national markets did remain concentrated; and this is something that we tried to address through our decisions – for instance involving the UK.

Finally, the public interventions have not affected the market performance of non-aided banks which, in fact, have performed a lot better than aided banks.

At the end of 2010 – the end of the period covered by the study – aided banks had caught up and reached an average return on equity similar to that of non-aided banks. It stood at around 7%; whereas at the beginning of 2008 the average level was 15%.

Apart from these direct effects on the market, the crisis State aid regime has had other, equally important effects.

The most important effect is the restructuring of the banking sector. The restructuring conditions we imposed – such as burden sharing and the obligation to repay the aid received – are crucial for financial stability in the longer term.

All aided banks have had to engage in a restructuring process which follows common principles but is defined in its details for each case after a careful review and thorough negotiations.

The constant dialogue that we’ve been holding with the authorities in the Member States and with the banks is helping to prepare the banking sector for the new business conditions that it will find in the post-crisis financial environment.

The vast majority of banks that have restructured according to the plans agreed with the Commission are generating profits and – in many cases – are paying back the support they got from their governments.

However, a few other banks have not submitted their plans in time or do not implement them as agreed. My response is immediate in these cases, because a bank that does not face up to its responsibilities becomes a threat to financial stability and a hurdle on the path to recovery.

We will need new EU-level instruments for crisis management and resolution in the banking sector.

When Lehman Brothers collapsed, the EU did not have the instruments and institutions it needed to let banks fail without harming financial stability and the integrity of the internal market.

State aid control emerged as the only instrument available at EU level and, over the past three years, it has played the role of a de facto resolution mechanism.

In the meantime, the Commission has been working on regulatory measures that will establish a new EU-wide resolution framework – and I cooperate closely with my colleagues in the College on this project.

I am perfectly aware that State aid control cannot replace a proper regulatory framework for crisis management in the long run. However – until the new legislation comes into effect – State aid control will continue to serve as a resolution tool.

We must put the financial sector back on track if we are to take the path of recovery. And to do this, regulation and competition control are complementary.

Regulation is necessary to tackle systemic challenges and to guarantee the conditions for fair and open competition on the markets.

But a good regulatory framework is not enough; a robust implementation of competition rules is just as necessary to fight the illegal practices of individual banks or countries.

The emergency package to rescue and restructure banks is temporary by definition. As soon as the crisis is over, the exceptional rules will disappear – and the sooner, the better.

I have said many times that, when market conditions improved, we would replace the crisis rules with the new rescue and restructuring measures that we have been preparing for some time now.

Only a few months ago, we hoped we could make the switch at the end of this year; we were ready for it. Unfortunately, the conditions on the markets have deteriorated again and it would no longer be safe to press ahead with that plan.

I will therefore propose to the College to extend into 2012 the crisis State aid rules for banks. Let's hope that in the next year we will be able to come back to a normal regime of State Aid in this domain.

And in the meantime, let's hope that markets will calm down; that banks will resume lending to the real economy; that growth will take again a sustainable path; that new jobs will be created again; and that the taxpayers will recover the resources they have been obliged to put on the table to prevent an even worse crisis.